Thursday, July 31, 2008

Daytrading funds need a locate

"If the Securities and Exchange Commission expands its clampdown on short-selling, it is widely expected to slam hedge funds like Stephen Cohen's SAC Capital and James Simon's Renaissance Technologies, which profit from fast-and-furious trading, experts predicted.

That's because under the long-accepted rules of the short-selling game, these hedge funds, which often trade through sophisticated computer programs, have been able to skip the process of borrowing the shares needed to cap off their short positions.

But that luxury is now being challenged by the SEC's mandate requiring investors who short 19 financial stocks, including Fannie Mae and Freddie Mac, to borrow the shares they short before they bet against the stock whose price they predict will fall.

Previously, short sellers could rely on a broker's promise that the shares could be delivered, if need be, within a few days.

"The guys who do the rapid trading stuff, they're shorting without having to borrow because they know they're going to close out by the end of the day," said one hedge fund manager. "Those are the people who are going to be most impacted by this."

Under the new rules, "if a prime broker does not have it physically pre-borrowed, those trading opportunities may be gone," said well-known short trader Jim Chanos, speaking on behalf of his organization, which is lobbying against the SEC's rules.

Among those most likely to be affected are day-trading shops like SAC, Renaissance and Ken Griffin's Citadel Investment Group, which trade shares so quickly they rarely need the shares to be delivered."

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